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The Stock Market in December

Towards the end of the year there seems to be an inverse relationship between the weather and the stock market. In December, as temperatures get colder, shares get hotter! Since 1970 the FTSE All Share Index has risen in 76% of all years with an average monthly return of 2.2%.

Incredibly, the index has only fallen four times in December since 1986, and in only one of those years was the decline significantly large. As it happens, the market did fall last December, in 2014, but this is worth mentioning as it is such a rare event. So, this all makes December the strongest month in the year for shares.

Given the general strength of the market in December, an odd feature of the month is that it has the weakest first trading day for any month in the year –average first day returns have been -0.07% with a probability of a positive return a lowly 45%.

The average December

After this first trading day, on average the market tends to increase gently in the first two weeks of the month, but then rises strongly in the final two weeks. Indeed, this is the strongest two-week period in the whole year, with the three strongest days of the year all occurring in this two-week period.

Santa Rally

This final spurt in share prices at the end of the year is sometimes called the Christmas, or Santa, Rally. Although there is no common agreement on exactly when the rally starts – some say it covers the whole of December, others (and the data tends to back this up) say it just covers the final two weeks of the year. In recent years there has been some sign that shares have started rising as early as November in anticipation of the Christmas Rally.

Diary

December is a very quiet month for company results: only three FTSE 100 companies release their prelims (finals) in this month and three their interims, so a quiet time for company analysts.

Dates to watch this month are: 2 Dec – US Nonfarm payroll report, 15 Dec – MPC interest rate announcement at 12 noon, 16 Dec – Triple Witching. And note that the London Stock Exchange will close early at 12h30 on the 24th and 31st and will be closed all day on the 25th.